Outlook for ’09 at Fon

We are now facing the toughest environment that I have ever seen for start ups. We have gone from financial markets and VCs willing to finance dreams to a “show me the money” reality that will force start ups to close their doors if they can´t delivere. Fearing this new scenario and warned ahead of time by our investors at Allen and Co, I started cutting costs at Fon during early 08. The cutting was severe, we let go around half of our people, we shrank from around 90 employees around the world to 40 now. Moreover we stopped subsidizing our hardware. But surprisingly the combination of employee reductions with subsidy ends was still accompanied with tremendous revenue growth and now it is almost sure that Fon will start making money this year.

Fon earns margin out of two different sources, telecom sales, meaning people who are not WiFi donors but require WiFi and pay per hour, day or 5 days, and buyers of our hardware, the Fon WiFi routers, our social routers known as La Fonera or Foneras in plural.

In terms of telco sales last week was FON’s best week ever. After a tough winter in which both hardware and telco sales were shrinking, telco sales turned around and grew from 30K to 47K euros per week in the last 4 weeks alone: this is 50% revenue growth over the average winter week. Revenues and hotspot growth is mainly coming from BT and Zon in Portugal but it is also coming from many countries around the world. Our best countries are UK, France, Japan, Portugal, and Germany. Why was the winter so bad for us? I think that the global crisis “froze” people for a while and now they are relaxing their spending again. Also WiFi is partly an outdoor product and the winter is bad for us in general. We were also hit by the pound´s collapse against the euro which fortunately is now reversing.

On the hardware side FON’s outlook is bright. We have over 3000 pre ordered Fonera 2.0. We will start selling the Fonera 2.0 in Europe on April 21st. Due to cash conservation we have been very cautious in ordering stocks of the Fonera 2.0, but now it looks like we have been overly cautious. If you google Fonera 2.0 you will see that we are getting a lot of pre release reviews and that not a single one is negative. Tech bloggers and journalists appreciates a router that not only has the basic Fon functionality of free WiFi roaming and allowing its owner to make money from it but the more advance functionality of taking care of your uploading and downloading while your computer is off. They also like the 3G to WiFi conversion capability as many gadgets, especially gaming gadgets come with WiFi but not with 3G.

So now that we have shrank our monthly expenditures from 700K in Jan 08 to 210K euros per month now and are growing revenues so fast, it looks like we will break even this summer. If we do we will be a sustainable, profitable company which is the only guarantee of survival in an environment of cash starvation.

Bottom line is that we are not out of the desert yet, but we are getting close.

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